FHA versus conventional- I am confused

Do you think there’s a downside to using an FHA loan for a house if it gets us a cheaper monthly payment? I just thought since we could get a conventional loan based on my credit score we should, but the calculations for $30k down with the current rates are abysmal. I don’t want to pay more than $2000 a month, and that barely gets us a $300k house. A coworker was showing me a program a local builder is doing for FHA loans: 3% down, the builder pays closing costs and will buy down the interest rate to 5.5% (30-year fixed rate), which means (if I did the math right, idk if I did) we could easily afford a $400k house, and the payment is $2000 a month. Is there a catch to using these types of programs? Our rent is $2000 a month now, the lease is up in July, so we are about to start looking once we file our taxes for last year, but I was feeling pretty discouraged with the numbers I had been putting into a mortgage calculator.

Yes. You cannot drop PMI for 11 years (assuming a 10% down payment) or ever if less than 10%. Also, you pay 1.75% in UFMIP on FHA loans. Additionally, builders often underestimate taxes and insurance in estimates, so be sure to verify those costs.

@Keagan
Is it worth it to deal with PMI if it means our monthly payment is less just so we can have our own space? We’re 32, trying to have kids, and have only ever rented because we make middle-class money, which could have gotten us a house pre-COVID. We just want our own space.

@Noble
It might be worth it for the lower payment now, but you should run a full payment comparison between FHA and conventional loans to see what works best long-term.

FHA requires 3.5% down, not 3%. For a $400k house with 3.5% down, your loan amount would be $386k. Just principal and interest on that would be $2,200/month. Add taxes, homeowners insurance, and mortgage insurance, and you’ll likely be closer to $2,500/month.

@Lake
Thanks, I figured the online calculator wasn’t the most accurate. I just got a raise and increased my hours at work, so truthfully we could afford $2,500, but that feels like a lot.

The main downside is that the mortgage insurance doesn’t come off at all if you put down less than 10%. But with the current rate difference, taking the FHA loan for the lower payment might make sense.

FHA loans are widely used by first-time buyers because of the lower down payment. To calculate affordability, remember: your mortgage (principal, interest, taxes, and insurance) shouldn’t exceed 25-28% of your gross income. Add all other debts to this, and your total debt-to-income ratio shouldn’t exceed 35-36% of your gross income.

@Vic
Our debt is pretty good—just student loans and one car payment. We also have a credit card, but I pay it off every month, so it doesn’t accrue a balance. I just want to stay conservative with our monthly payment.